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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q   þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 2005.
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM  TO
 Commission file number: 0-22187 RENAISSANCE LEARNING, INC.  Wisconsin
    
    39-1559474(State or other
jurisdiction of incorporation)
    
    (I.R.S. Employer
Identification No.)
 2911 Peach Street
P.O. Box 8036
Wisconsin Rapids, Wisconsin
(Address of principal executive offices) 54495-8036
(Zip Code) (715) 424-3636
(Registrants telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes þ No o Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date. Outstanding atClass
    
    April 30, 2005Common Stock, $0.01 par value
    
    30,598,782




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RENAISSANCE LEARNING, INC. INDEX TO FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005  
 PagePART I  FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at March 31, 2005 and December 31, 2004
    
    
    1Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2005 and 2004
    
    
    2Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    7Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    10Item 4. Controls and Procedures
    
    
    10PART II  OTHER INFORMATIONItem 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    11Item 6. Exhibits
    
    
    11Certification of CEOCertification of CFOCertification of CEOCertification of CFO
  - Index -




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PART I  FINANCIAL INFORMATION 
 Item 1.Financial Statements RENAISSANCE LEARNING, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
  March 31,
    
    
    December 31,2005
    
    
    2004(In Thousands, Except Share andPer Share Amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    39,340
    
    
    $
    27,460Investment securities
    
    
    19,630
    
    
    
    25,103Accounts receivable, less allowances of $1,248 and $1,283, respectively
    
    
    8,361
    
    
    
    8,441Inventories
    
    
    2,206
    
    
    
    2,364Prepaid expenses
    
    
    1,138
    
    
    
    1,194Deferred tax asset
    
    
    3,666
    
    
    
    3,800Assets of discontinued operations
    
    
    
    
    
    
    1,149Other current assets
    
    
    400
    
    
    
    453Total current assets
    
    
    74,741
    
    
    
    69,964Investment securities
    
    
    16,670
    
    
    
    21,003Property, plant and equipment, net
    
    
    18,454
    
    
    
    18,552Deferred tax asset
    
    
    1,659
    
    
    
    1,620Goodwill
    
    
    2,752
    
    
    
    2,757Other intangibles, net
    
    
    138
    
    
    
    192Capitalized software, net
    
    
    513
    
    
    
    636Total assets
    
    $
    114,927
    
    
    $
    114,724LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,341
    
    
    $
    2,377Deferred revenue
    
    
    15,096
    
    
    
    16,484Payroll and employee benefits
    
    
    2,137
    
    
    
    2,832Income taxes payable
    
    
    2,340
    
    
    
    925Liabilities of discontinued operations
    
    
    
    
    
    
    1,650Other current liabilities
    
    
    4,039
    
    
    
    3,881Total current liabilities
    
    
    26,953
    
    
    
    28,149Deferred revenue
    
    
    558
    
    
    
    620Deferred compensation
    
    
    1,305
    
    
    
    1,354Total liabilities
    
    
    28,816
    
    
    
    30,123Minority interest
    
    
    191
    
    
    
    184Shareholders equity:Common stock, $.01 par; shares authorized: 150,000,000;
issued: 34,736,647 shares at Dec. 31, 2004 and March 31, 2005
    
    
    347
    
    
    
    347Additional paid-in capital
    
    
    54,373
    
    
    
    54,490Retained earnings
    
    
    104,612
    
    
    
    99,689Treasury stock, at cost 4,067,965 shares March 31, 2005;
3,865,280 shares Dec. 31, 2004
    
    
    (73,504
    )
    
    
    (70,213
    )Accumulated other comprehensive income
    
    
    92
    
    
    
    104Total shareholders equity
    
    
    85,920
    
    
    
    84,417Total liabilities and shareholders equity
    
    $
    114,927
    
    
    $
    114,724
 See accompanying notes to condensed consolidated financial statements. - 1 -




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (unaudited)
 For the Three Months EndedMarch 31,2005
    
    
    2004(In thousands, Except Per Share Amounts)Net sales:Products
    
    $
    21,126
    
    
    $
    24,804Services
    
    
    6,431
    
    
    
    6,151Total net sales
    
    
    27,557
    
    
    
    30,955Cost of sales:Products
    
    
    1,189
    
    
    
    1,703Services
    
    
    2,760
    
    
    
    3,535Total cost of sales
    
    
    3,949
    
    
    
    5,238Gross profit
    
    
    23,608
    
    
    
    25,717Operating expenses:Product development
    
    
    3,618
    
    
    
    3,596Selling and marketing
    
    
    8,045
    
    
    
    8,624General and administrative
    
    
    3,069
    
    
    
    3,137Total operating expenses
    
    
    14,732
    
    
    
    15,357Operating income
    
    
    8,876
    
    
    
    10,360Other income, net
    
    
    456
    
    
    
    389Income
 continuing operations before income taxes
    
    
    9,332
    
    
    
    10,749Income taxes  continuing operations
    
    
    3,453
    
    
    
    4,005Income  continuing operations
    
    
    5,879
    
    
    
    6,744Income (loss) on discontinued operations,
net of tax benefit of $1,417 in 2005 and $515 in 2004
    
    
    584
    
    
    
    (802
    )Net income
    
    $
    6,463
    
    
    $
    5,942Earnings per share:Basic:Continuing operations
    
    $
    0.19
    
    
    $
    0.22Discontinued operations
    
    
    0.02
    
    
    $
    (0.03
    )Net income
    
    $
    0.21
    
    
    $
    0.19Diluted:Continuing operations
    
    $
    0.19
    
    
    $
    0.22Discontinued operations
    
    
    0.02
    
    
    $
    (0.03
    )Net income
    
    $
    0.21
    
    
    $
    0.19Cash dividends declared per share
    
    $
    0.05
    
    
    $
    2.19
 See accompanying notes to condensed consolidated financial statements. - 2 -




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 For the Three Months EndedMarch 31,2005
    
    
    2004(In Thousands)Reconciliation of net income to net cash provided by operating activities:Net income
    
    $
    6,463
    
    
    $
    5,942Adjustments
to arrive at cash provided by operating activitiesDepreciation and amortization
    
    
    745
    
    
    
    934Amortization of investment discounts/premiums
    
    
    132
    
    
    
    246Deferred income taxes
    
    
    95
    
    
    
    (331
    )(Gain) loss on disposal of discontinued operations
    
    
    (702
    )
    
    
    Income tax benefit from the exercise of stock options
    
    
    10
    
    
    
    Change in assets and liabilities -Accounts receivable
    
    
    81
    
    
    
    896Inventories
    
    
    158
    
    
    
    (332
    )Prepaid expenses
    
    
    56
    
    
    
    149Accounts payable and other current liabilities
    
    
    1,799
    
    
    
    881Deferred revenue
    
    
    (1,450
    )
    
    
    (93
    )Other current assets
    
    
    51
    
    
    
    58Other
    
    
    108
    
    
    
    30Net cash provided by operating activities
    
    
    7,546
    
    
    
    8,380Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (452
    )
    
    
    (350
    )Purchase of investment securities
    
    
    (95
    )
    
    
    (4,031
    )Maturities/sales of investment securities
    
    
    9,768
    
    
    
    12,460Capitalized software development costs
    
    
    (4
    )
    
    
    (119
    )Net proceeds from disposal of discontinued operations
    
    
    75
    
    
    
    Net cash provided by investing activities
    
    
    9,292
    
    
    
    7,960Cash flows from financing activities:Return of capital to minority interest
    
    
    
    
    
    
    (54
    )Proceeds from exercise of stock options
    
    
    504
    
    
    
    2,416Dividends paid
    
    
    (1,541
    )
    
    
    (67,877
    )Purchase of treasury stock
    
    
    (3,921
    )
    
    
    Net cash used by financing activities
    
    
    (4,958
    )
    
    
    (65,515
    )Net increase (decrease) in cash
    
    
    11,880
    
    
    
    (49,175
    )Cash and cash equivalents, beginning of period
    
    
    27,460
    
    
    
    62,524Cash and cash equivalents, end of period
    
    $
    39,340
    
    
    $
    13,349
 See accompanying notes to condensed consolidated financial statements. - 3 -




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RENAISSANCE LEARNING, INC. AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1.Consolidation The condensed consolidated financial statements include the financial results of Renaissance
Learning, Inc. and our subsidiaries. Our only significant subsidiary, as of March 31, 2005 is
Renaissance Corporate Services Inc. Generation21 Learning Systems, LLC was divested during the
first quarter of 2005 and, therefore, its results for all periods presented in the financial
statements are reflected as discontinued operations. 2.Basis of Presentation The condensed consolidated financial statements reflect all adjustments (consisting only of
normal recurring adjustments) which are, in our opinion, necessary for a fair presentation of the
results of the interim periods, and are presented on an unaudited basis. These financial
statements should be read in conjunction with the financial information contained in our Annual
Report on Form 10-K for the year ended December 31, 2004, which is on file with the U.S. Securities
and Exchange Commission (2004 Annual Report). The results of operations for the three-month periods ended March 31, 2005 and 2004 are not
necessarily indicative of the results to be expected for the full year. 3.Earnings Per Common Share Basic earnings per common share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Shares issued and shares reacquired during
the period are weighted for the portion of the period they were outstanding. Diluted earnings per
common share has been computed based on the weighted average number of common shares outstanding,
increased by the number of additional common shares that would have been outstanding if the
potentially dilutive stock option shares had been issued. On April 17, 2002, our Board of Directors authorized the repurchase of up to 5,000,000 shares
of our common stock. On February 9, 2005, our Board of Directors authorized the repurchase of up
to an additional 3,000,000 shares under our stock repurchase program. No time limit was placed on
the duration of the stock repurchase program, nor is there any dollar limit on the program.
Repurchased shares will become treasury shares and will be used for stock-based employee benefit
plans and for other general corporate purposes. During the quarter ending March 31, 2005, we
repurchased 237,400 shares at a cost of $3.9 million. As of March 31, 2005 the cumulative number
of shares repurchased under this program was 4.5 million with an aggregate cost of $82.3 million. The weighted average shares outstanding are as follows: Three Months Ended March 312005
    
    
    2004Basic weighted average shares outstanding
    
    
    30,816,536
    
    
    
    30,963,565Dilutive effect of outstanding stock options
    
    
    41,757
    
    
    
    270,829Diluted weighted average shares outstanding
    
    
    30,858,293
    
    
    
    31,234,394
 For the three months ended March 31, 2005 and 2004, respectively, there were 1,281,374 and
667,500 shares attributable to outstanding stock options excluded from the calculation of diluted
earnings per share because their effect was antidilutive. These options could be dilutive in the
future. 4.Comprehensive Income Total comprehensive income was $6.5 million and $6.0 million in the first quarter of 2005 and
2004, respectively. Our comprehensive income includes net income and foreign currency translation
adjustments. - 4 -




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5.Goodwill and Other Intangible Assets In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not
amortized but is tested at least annually for impairment. Our other intangibles consist solely of
a non-compete agreement which we amortize over its estimated useful life of five years. The
non-compete agreement will be fully amortized at the end of 2005. For the three months ended March
31, 2005 and 2004, we recognized amortization expense on other intangibles of $55,000 and $74,000,
respectively. No goodwill or other intangibles were acquired or impaired during the first quarter
of 2005 or 2004. The non-compete agreement has an original cost of $1,100,000. Associated
accumulated amortization was $908,000 at December 31, 2004 and was $962,000 at March 31, 2005. 6.Stock Option Plan We have established the 1997 Stock Incentive Plan for our officers, key employees and
non-employee directors. The intrinsic value method as prescribed in APB 25, Accounting for Stock
Issued to Employees, is used to account for stock based compensation arrangements. Had
compensation cost been determined for our plan based on the fair value at the grant dates for
awards consistent with the alternative method set forth under SFAS 123, Accounting for Stock-Based
Compensation, our net income and earnings per share would have been adjusted to the pro forma
amounts indicated below: For the Three Months EndedMarch 31,2005
    
    
    2004(In thousands, except per share amounts)Net Income, as reported
    
    $
    6,463
    
    
    $
    5,942Deduct: total stock-based compensation
expense determined under fair-value based
method for all awards, net of tax
    
    
    248
    
    
    
    595Pro forma net income
    
    $
    6,215
    
    
    $
    5,347Net Income per share:Basic as reported
    
    $
    0.21
    
    
    $
    0.19Basic pro forma
    
    $
    0.20
    
    
    $
    0.17Diluted as reported
    
    $
    0.21
    
    
    $
    0.19Diluted pro forma
    
    $
    0.20
    
    
    $
    0.17
 In April 2005 our Board of Directors approved the acceleration of vesting of the unvested stock
options under our 1997 Stock Incentive Plan. This resulted in options to purchase approximately
438,000 shares of our common stock becoming immediately exercisable. All of the unvested stock
options for which vesting was accelerated were underwater, with exercise prices greater than the
closing price of our common stock on the date of acceleration. Vesting of the options was
accelerated as part of our plan to transition the equity-based portion of our executive
compensation plan from stock options to grants of restricted stock, which we believe will be a more
effective performance incentive and retention tool. Also, accelerated vesting of the options will
produce more favorable impact on our future results of operations in light of SFAS No. 123
(revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R, which we will be required to adopt
effective January 1, 2006, requires that compensation cost attributed to stock options and other
forms of share-based payment be recognized in the financial statements. We estimate that early
vesting of these options will result in approximately $1.1 million less future compensation expense
that would otherwise have been recognized over the remaining life of the options beginning on
January 1, 2006. - 5 -




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The fair value of options granted in the first quarter of 2005 and 2004 were estimated on the
date of grant using the Black-Scholes option pricing model with the following weighted average
assumptions: Three MonthsEnded March 31,2005
    
    
    2004Dividend yield
    
    
    1.23
    %
    
    
    0.64
    %Expected volatility
    
    
    60.0
    %
    
    
    65.0
    %Risk-free interest rate
    
    
    4.10
    %
    
    
    3.24
    %Expected life (in years)
    
    
    5.9
    
    
    
    6.0
 7.Dividends On April 20, 2005, our Board of Directors declared a quarterly cash dividend of $.05 per
share, payable June 1, 2005 to shareholders of record as of May 13, 2005. - 6 -




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Item 2.Managements Discussion and Analysis of Financial Condition and Results of
Operations Results of Operations Our results of operations can be affected by many factors including the general economic
environment and its impact on state and federal budgetary decisions, the length and complexity of
the sales cycle for school districts, and the impacts on revenue of transitioning some of our
offerings to new subscription-based products and services which results in a significant portion of
the revenue being initially deferred and recognized as revenue over the subscription period. Our
first quarter revenues are also impacted by seasonality because schools and districts typically
make their purchasing plans and renew their subscriptions for the new academic school year in the second and third quarters.
Each of these factors negatively impacted our results of operations for the three month period
ended March 31, 2005. Generation21 Learning Systems, LLC was divested during the first quarter of 2005 and,
therefore, its results for all periods presented in the financial statements are reflected as
discontinued operations. The following table sets forth certain consolidated income statement data in dollars and as a
percentage of net sales, except that individual components of costs of sales and gross profit are
shown as a percentage of their corresponding component of net sales: Three Months Ended March 31,2005
    
    
    2004
    
    
    Change(Dollars In Thousands)Net Sales:Products
    
    $
    21,126
    
    
    
    76.7
    %
    
    $
    24,804
    
    
    
    80.1
    %
    
    $
    (3,678
    )
    
    
    -14.8
    %Services
    
    
    6,431
    
    
    
    23.3
    %
    
    
    6,151
    
    
    
    19.9
    %
    
    
    280
    
    
    
    4.6
    %Total net sales
    
    
    27,557
    
    
    
    100.0
    %
    
    
    30,955
    
    
    
    100.0
    %
    
    
    (3,398
    )
    
    
    -11.0
    %Cost of sales:Products
    
    
    1,189
    
    
    
    5.6
    %
    
    
    1,703
    
    
    
    6.9
    %
    
    
    (514
    )
    
    
    -30.2
    %Services
    
    
    2,760
    
    
    
    42.9
    %
    
    
    3,535
    
    
    
    57.5
    %
    
    
    (775
    )
    
    
    -21.9
    %Total cost of sales
    
    
    3,949
    
    
    
    14.3
    %
    
    
    5,238
    
    
    
    16.9
    %
    
    
    (1,289
    )
    
    
    -24.6
    %Gross profit:Products
    
    
    19,937
    
    
    
    94.4
    %
    
    
    23,101
    
    
    
    93.1
    %
    
    
    (3,164
    )
    
    
    -13.7
    %Services
    
    
    3,671
    
    
    
    57.1
    %
    
    
    2,616
    
    
    
    42.5
    %
    
    
    1,055
    
    
    
    40.3
    %Total gross profit
    
    
    23,608
    
    
    
    85.7
    %
    
    
    25,717
    
    
    
    83.1
    %
    
    
    (2,109
    )
    
    
    -8.2
    %Operating expenses:Product development
    
    
    3,618
    
    
    
    13.1
    %
    
    
    3,596
    
    
    
    11.6
    %
    
    
    22
    
    
    
    0.6
    %Selling and marketing
    
    
    8,045
    
    
    
    29.2
    %
    
    
    8,624
    
    
    
    27.9
    %
    
    
    (579
    )
    
    
    -6.7
    %General and administrative
    
    
    3,069
    
    
    
    11.1
    %
    
    
    3,137
    
    
    
    10.1
    %
    
    
    (68
    )
    
    
    -2.2
    %Total operating expenses
    
    
    14,732
    
    
    
    53.5
    %
    
    
    15,357
    
    
    
    49.6
    %
    
    
    (625
    )
    
    
    -4.1
    %Operating income
    
    
    8,876
    
    
    
    32.2
    %
    
    
    10,360
    
    
    
    33.5
    %
    
    
    (1,484
    )
    
    
    -14.3
    %Other income:Interest income
    
    
    352
    
    
    
    1.3
    %
    
    
    311
    
    
    
    1.0
    %
    
    
    41
    
    
    
    13.2
    %Other, net
    
    
    104
    
    
    
    0.4
    %
    
    
    78
    
    
    
    0.3
    %
    
    
    26
    
    
    
    33.3
    %Total other income
    
    
    456
    
    
    
    1.7
    %
    
    
    389
    
    
    
    1.3
    %
    
    
    67
    
    
    
    17.2
    %Income  continuing operations
before income taxes
    
    
    9,332
    
    
    
    33.9
    %
    
    
    10,749
    
    
    
    34.7
    %
    
    
    (1,417
    )
    
    
    -13.2
    %Income taxes  continuing operations
    
    
    3,453
    
    
    
    12.5
    %
    
    
    4,005
    
    
    
    12.9
    %
    
    
    (552
    )
    
    
    -13.8
    %Income  continuing operations
    
    
    5,879
    
    
    
    21.3
    %
    
    
    6,744
    
    
    
    21.8
    %
    
    
    (865
    )
    
    
    -12.8
    %Income (loss) on discontinued operations
net of tax benefit of $1,417 in 2005 and $515 in 2004
    
    
    584
    
    
    
    2.1
    %
    
    
    (802
    )
    
    
    -2.6
    %
    
    
    1,386
    
    
    
    -172.8
    %Net income
    
    $
    6,463
    
    
    
    23.5
    %
    
    $
    5,942
    
    
    
    19.2
    %
    
    $
    521
    
    
    
    8.8
    %
 - 7 -




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Three Months Ended March 31, 2005 and 2004 Net Sales. Our net sales decreased by $3.4 million, or 11.0%, to $27.6 million in the first
quarter of 2005 from $31.0 million in the first quarter of 2004. Product sales declined by $3.7
million, or 14.8%, to $21.1 million in the first quarter of 2005 from $24.8 million in the first
quarter of 2004. Revenues were down for all core products with the largest decline in Accelerated
Math*. We now only sell this product as part of our comprehensive Math Renaissance solution which
increased the initial price of the product and likely affected sales over the short-term, however,
we believe this approach will lead to long-term growth of the product. Service revenue for the first quarter of 2005 was $6.4 million, an increase of $280,000 from
the first quarter 2004 revenues of $6.2 million. A 17% increase in attendance at our National
Conference, to about 3,500 from about 3,000 in the previous year, resulted in an increase in
service revenue of $190,000 for the first quarter of 2005 compared to 2004. We also experienced
growth in revenue from software support and from some of our newer service offerings such as
academic coaching and technical consulting which were partially offset by declines in revenue from
our on-site training events. Overall revenue levels continued to be impacted by constraints in school spending related to
the state budget difficulties of the past several years. We also believe that the seasonality of
our customers buying patterns is becoming more pronounced as more schools transition to our
subscription products and services which typically follow the academic school year cycle, resulting
in order and reorder patterns shifting to a greater degree into the second and third quarters when
schools and districts are making plans for the upcoming school year as well as renewing existing
subscriptions. Cost of Sales. The cost of sales of products decreased by $0.5 million, or 30.2%, to $1.2
million in the first quarter of 2005 from $1.7 million in the first quarter of 2004. As a
percentage of product sales, the cost of sales of products decreased to 5.6% in the first quarter
of 2005 from 6.9% in the first quarter of 2004. This decrease is due primarily to reduced scanner
warranty costs and continued cost efficiencies in delivering custom assessment products. The cost of sales of services decreased by $0.8 million, or 21.9%, to $2.8 million in the
first quarter of 2005 from $3.5 million in the first quarter of 2004. As a percentage of sales of
services, the cost of sales of services decreased to 42.9% in the first quarter of 2005 from 57.5%
in the first quarter of 2004. The significant improvement can be attributed to three categories of
services: the national conference, where we achieved significantly improved profitability; our
coaching services, where we were ramping up our cost structure ahead of revenue recognition in the
prior year; and software support, where we are seeing margin improvement due to reduced
discounting. Product Development. Product development expenses were $3.6 million in the first quarter of
2005, unchanged from first quarter of 2004. As a percentage of net sales, product development
costs increased to 13.1% in the first quarter of 2005 from 11.6% in the first quarter of 2004
primarily due to the decline in sales. Selling and Marketing. Selling and marketing expenses of $8.0 million in the first quarter of
2005 were down by $0.6 million, or 6.7%, from $8.6 million in the first quarter of 2004. As a
percentage of net sales, selling and marketing expenses increased to 29.2% in the first quarter of
2005 from 27.9% in the first quarter of 2004. General and Administrative. General and administrative expenses were $3.0 million for the
first quarter of 2005, compared to $3.1 million in the first quarter of 2004. As a percentage of
net sales, general and administrative expenses increased to 11.1% from 10.1% due to the decline in
sales. Operating Income. Operating income was $8.9 million, or 32.2% of net sales in the first
quarter of 2005, compared to $10.4 million, or 33.5% of net sales in the first quarter of 2004. Income Tax Expense -Continuing Operations. Income tax expense of $3.4 million, for continuing
operations, was recorded in the first quarter of 2005 at an effective income tax rate of 37.0% of
pre-tax income, compared to $4.0 million, or 37.3% of pre-tax income in the first quarter of 2004. * AR, AccelScan, AccelTest, Accelerated Grammar and Spelling, Accelerated Math, Accelerated
Reader, Accelerated Vocabulary, Accelerated Writer, Fluent Reader, Math Facts in a Flash, Math
Renaissance, Read Now, Reading Renaissance, Renaissance, Renaissance Learning, Renaissance Place,
School Renaissance, STAR Early Literacy, STAR Reading, STAR Math, StandardsMaster, TestCheck and
Writing Renaissance are trademarks of Renaissance Learning, Inc. registered ® or pending
registration in the United States, with other applications issued or pending in other countries. - 8 -




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Discontinued Operations. We recorded a gain on the sale of Generation21 of approximately $0.7
million, including a one-time tax benefit of $1.1 million. When combined with the operating losses
incurred in January and February for that subsidiary, the net income from discontinued operations
totaled approximately $0.6 million in the first quarter of 2005. The net operating loss from
Generation21 in the first quarter 2004 resulted in a net loss of approximately $0.8 million in that
period. Liquidity and Capital Resources As of March 31, 2005, our cash, cash equivalents and investment securities were $75.6 million,
up $2.0 million from the December 31, 2004 total of $73.6 million. We continue to maintain a
strong cash position, which we believe, when coupled with cash flow from operations, will be
sufficient to meet both our short-term and long-term working capital requirements including the
cash required to acquire AlphaSmart, Inc. which is expected to close during the second quarter of
2005. At March 31, 2005, we had a $15.0 million unsecured revolving line of credit with a bank that
is available until May 31, 2006. The line of credit bears interest at either a floating rate based
on the prime rate less 1.0%, or a fixed rate for a period of up to 90 days based on LIBOR plus
1.25%. The rate is at our option and is determined at the time of borrowing. We also have a $2.0
million unsecured revolving line of credit with a bank available until April 30, 2006. The line of
credit bears interest based on the prime rate less 1.0%. As of March 31, 2005, the lines of credit
had not been used. On April 17, 2002, our Board of Directors authorized the repurchase of up to 5,000,000 shares
of our common stock. On February 9, 2005, our Board of Directors authorized the repurchase of up
to an additional 3,000,000 shares under our stock repurchase program. No time limit was placed on
the duration of the stock repurchase program, nor is there any dollar limit on the program.
Repurchased shares will become treasury shares and will be used for stock-based employee benefit
plans and for other general corporate purposes. During the quarter ended March 31, 2005, we
repurchased 237,400 at a cost of $3.9 million. Since authorization, we have repurchased 4.5
million shares at a cost of $82.3 million under this repurchase program. Depending on our stock
valuation, cash availability and other factors, we may repurchase additional shares as a beneficial
use of our cash to enhance shareholder value. Off-Balance Sheet Arrangements and Aggregate Contractual Obligations As of March 31, 2005, we did not have any off-balance sheet transactions, arrangements, or
obligations (including contingent obligations) that would have a material effect on our financial
results. We enter into operating leases, primarily for facilities that we occupy in order to carry out
our business operations. As of March 31, 2005, there has been no material change in our operating
leases from that disclosed in our 2004 Annual Report. As of March 31, 2005, there has been no change in our long-term debt obligations,
capital-lease obligations or long-term purchase obligations from that disclosed in our 2004 Annual
Report. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make judgments, estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates. There have been no significant changes to our
critical accounting policies that were disclosed in our 2004 Annual Report. Forward-Looking Statements In accordance with the Private Securities Litigation Reform Act of 1995, we can obtain a
safe-harbor for forward-looking statements by identifying those statements and by accompanying
those statements with cautionary statements which identify factors that could cause actual results
to differ materially from those in the forward-looking statements. Accordingly, the foregoing
Managements Discussion and Analysis of Financial Condition and Results of Operations contains
certain forward-looking statements relating to growth plans, projected sales, revenues, earnings
and costs, and product development schedules and plans. Our actual results may differ materially
from those contained in the forward-looking statements herein. Factors which may cause such a
difference to occur include (i) a delay or reduction in - 9 -




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school purchases of our products due to state budgetary constraints resulting in a reduction in the
funds available to schools and (ii) those factors identified in Item 1, Business,
Forward-Looking Statements; Risk Factors contained in our 2004 Annual Report on Form 10-K,
which factors are incorporated herein by reference to such report. 
 Item 3.Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk. Our exposure to market interest rate risk consists of: (i) the increase
or decrease in the amount of interest income we can earn on our investment portfolio, and (ii) the
decrease or increase in value of our investment security portfolio if market interest rates
increase or decrease, respectively. We anticipate that we will have sufficient liquidity to hold
our investments to maturity, therefore, we do not expect to recognize any material losses or gains
related to an increase or decrease in market interest rates. Market Risk.Our exposure to market risk relates to the quality of the holdings in our
investment security portfolio. The fair market value of our investments is subject to increases or
decreases in value resulting from the performance of the securities issuer, from upgrades or
downgrades in the credit worthiness of the securities issuer, and from changes in general market
conditions. We seek to manage exposure to market risk by investing in accordance with our corporate
investment policy as established by our Board of Directors. The goals of the policy are: (i)
preservation of capital, (ii) provision of adequate liquidity to meet projected cash requirements,
(iii) minimization of risk of principal loss through diversified short and medium term investments,
and (iv) maximization of yields in relationship to the guidelines, risk, market conditions and tax
considerations. Our investment policy specifically requires that: (i) each investment have a maximum maturity
of 36 months, (ii) at least 10% of the portfolio be available on 30 days notice and not more than
30% of the portfolio have a maturity in excess of 24 months, (iii) each investment meet minimum
credit quality requirements, (iv) our portfolio be diversified such that not more than 10% is
invested in any one issuer (other than the US Treasury or its agencies, or money market funds), and
(v) each investment meet certain maximum maturity or tender option limits based on its minimum
credit rating. Our investment policy generally precludes investment in equity securities except
for the investment in funds for the purpose of hedging the market value exposure on the
supplemental Executive Retirement Plan (see note 10 of our Notes to Consolidated Financial
Statements contained in our 2004 Annual Report, which note is incorporated herein by reference to
such report). Due to the type and duration of investments in our portfolio, we do not expect to
realize any material gains or losses related to market risk. As of March 31, 2005 our investment
securities had a market value of approximately $36.0 million and a carrying value of $36.3 million. Foreign Currency Exchange Rate Risk.The financial position and results of operations of our
foreign subsidiaries are measured using local currency. Revenues and expenses of such subsidiaries
have been translated into U.S. dollars at average exchange rates prevailing during the period.
Assets and liabilities have been translated at the rates of exchange at the balance sheet date.
Translation gains or losses are deferred as a separate component of shareholders equity.
Aggregate foreign currency transaction gains and losses are included in determining net income. As
such, our operating results are affected by fluctuations in the value of the U.S. dollar compared
to the Australian dollar, British pound, Canadian dollar, and Indian Rupee. At this time, foreign
exchange rate risk is not significant due to the relative size of our foreign operations. 
 Item 4.Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our reports filed under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and that such information is accumulated and communicated to
our management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as
appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating
the companys disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and management was necessarily required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures. As of March 31, 2005, an evaluation was performed under the supervision and with the
participation of management, including our CEO and CFO, of the effectiveness of the design and
operation of our disclosure controls and - 10 -




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procedures. Based on that evaluation, management, including the CEO and CFO, concluded that our
disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the Securities and Exchange
Commission. There has been no change in our internal control over financial reporting that has occurred
during the quarter ended March 31, 2005 that has materially affected, or is reasonably likely to
materially affect, such internal control over financial reporting. 
 Part II  OTHER INFORMATION 
 Item 2.Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities Common Stock. On April 17, 2002, our Board of Directors authorized a repurchase program which
provides for the repurchase of up to 5,000,000 shares of our common stock. On February 9, 2005 our
Board of Directors authorized the repurchase of up to an additional 3,000,000 shares under the
stock repurchase program. No time limit was placed on the duration of the repurchase program, nor
is there any dollar limit on the program. Repurchased shares will become treasury shares and will
be used for stock-based employee benefit plans and for other general corporate purposes. The following table shows information relating to the repurchase of shares of our common stock
during the three months ended March 31, 2005: Total Number of
    
    
    MaximumShares Purchased
    
    
    Number of Sharesas Part of
    
    
    that May Yet BeTotal Number
    
    
    Average Price
    
    
    Publicly
    
    
    Purchased Underof Shares
    
    
    Paid per
    
    
    Announced Plans
    
    
    the Plans orPeriod
    
    Purchased
    
    
    Share
    
    
    or Programs
    
    
    ProgramsJanuary
    
    
    0
    
    
    $
    0.00
    
    
    
    0
    
    
    
    687,758February
    
    
    94,800
    
    
    
    16.21
    
    
    
    94,800
    
    
    
    3,592,958March
    
    
    142,600
    
    
    
    16.72
    
    
    
    142,600
    
    
    
    3,450,358Total
    
    
    237,400
    
    
    $
    16.52
    
    
    
    237,400
 
 Item 6.Exhibits Exhibits. Exhibit No.
    
    Description31.1
    
    Section 302 certification by John R. Hickey31.2
    
    Section 302 certification by Mary T. Minch32.1
    
    Section 906 certification by John R. Hickey32.2
    
    Section 906 certification by Mary T. Minch
 - 11 -




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RENAISSANCE LEARNING, INC.
(Registrant)May 10, 2005
    /s/ John R. HickeyDate
    John R. HickeyPresident and Chief Executive Officer
(Principal Executive Officer)May 10, 2005
    /s/ Mary T. MinchDate
    Mary T. MinchVice President-Finance, Chief Financial Officer, and Secretary
(Principal Financial and Accounting Officer) - 12 -




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Index to Exhibits Exhibit No.
    
    Description31.1
    
    Section 302 certification by John R. Hickey31.2
    
    Section 302 certification by Mary T. Minch32.1
    
    Section 906 certification by John R. Hickey32.2
    
    Section 906 certification by Mary T. Minch